Tag Archives: auto bailout

Auto Bailout Revisted; Thoughtbasket Gloats

Back during the heat of the auto bailout, when President Obama was being criticized for usurping the contractual rights of the bondholders, I wrote that he was doing no such thing…that he was merely playing hardball and winning. My money quote: “The creditors blinked first; they knew that if they took over the company it would essentially disintegrate overnight, and they would be left with a bunch of factories nobody would buy.”

New York Magazine recently did a long piece on Steve Rattner, Obama’s car czar, and in the sections that discuss Rattner’s negotiations with the creditors, it becomes clear that Rattner played the factual business hand, not the federal government will crush you hand.  To wit:

“In this go-round, Rattner held all the cards, and Lee [JP Morgan Chase Vice-Chairman Jimmy Lee] knew it.  The government was the lender of last resort, and if it walked away, Chrysler and GM would be sold off for parts.”

And then:

“Rattner almost laughed. “Jimmy, look. If you want the company, it’s yours,” Rattner told him. “If we can’t make a deal, then it’s your company,” which Lee knew he couldn’t afford.”

Finally, after JP Morgan Chase agreed, and only a few hedge funds were holding out, led by Daniel Arbess, portfolio manager of Xerion, we get the following:

“He’d [referring to Arbess] shrewdly picked up some bonds for as low as $.15 on the dollar. If the government paid $2 billion, he’d still make money. Did he want to risk that for the chance of greater returns? Arbess signed on.”

We don’t like to gloat here at Thoughtbasket, but sometimes we have no choice. Now if only we could get WordPress’ block quote function to work, life would be awesome.

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Chrysler Bailout and Contract Law

Conservative commentators have been criticizing how President Obama handled the Chrysler bankruptcy, saying that because the Administration pushed the secured creditors to take less than the UAW, which was unsecured, the basic tenets of contract law were violated. If the Administration had actually forced the secured creditors into this position, by passing some new law or threatening to arrest them, I would completely agree with these commentators. Rule of law is an essential underpinning of the American system.

But Obama did not “force” the creditors to do anything; he simply applied leverage. This is what parties do in contentious business negotiations. Whether it’s a bankruptcy or unwinding a marketing partnership, when it gets ugly the businesspeople start deploying whatever leverage they have. In Obama’s case, he had two levers: 1) the bully pulpit of the presidency; and 2) the fact that without the UAW on board, Chrysler was worthless and the creditors would get nothing.

With his bully pulpit lever, Obama did indeed “browbeat” the creditors. But hey, this is hardball here, and there were billions of dollars at stake. Plus these are vulture funds…they are used to being insulted. With his second lever, Obama simply was playing the game of chicken that is usually played in a bankruptcy, and he won. The creditors were saying “give us what we want or we’ll take over the company” and Obama replied “take what we’re offering or we’ll give you the company.” The creditors blinked first; they knew that if they took over the company it would essentially disintegrate overnight, and they would be left with a bunch of factories nobody would buy.

I’m as big a supporter of the rule of law as anyone – I have long said that exporting law is more important than exporting democracy – but this is not a case of the government ignoring the law. Instead it’s a case of government playing by the same rules as business, but playing better, which is something the right wing ideologues just can’t handle. And lest you think I’m alone in this, here are a law professor and a private equity professional saying similar things.

Which isn’t to say that I am a blanket supporter of the auto bailouts, because I’m not. I would have been perfectly happy to see Chrysler shut down. But any criticism should be on the merits, not based on a spurious claim being advanced for political reasons.

Auto Industry Bailout Follow Up

The NY Times is reporting that one of the things that kept the Republicans in the Senate from supporting the bailout was the UAW’s refusal to take any pay cuts until 2011. From the article, it sounds like Senator Bob Corker (R-TN) and UAW President Ron Gettelfinger are both lying, but regardless, if the UAW isn’t willing to make concessions right now, whether pay cuts or benefit cuts or work rule changes, then let the car companies go under and the UAW members find other jobs.